A storm is brewing for Asia’s climate targets

This is a reduced version of The Business Times’ ESG Insights newsletter. Sign up here to get the complete version in your inbox every week.

??This week: Without stronger government support, Asian companies could struggle to meet their more ambitious climate targets.

The past few years have seen a surge in the number of companies in the region declaring climate-related targets. In 2020, just over 20 per cent of South-east Asia’s investable listed companies had set climate targets, said MSCI in its latest Apac Climate Action Progress Report . In 2024, that percentage had almost tripled to 60 per cent.

Most of the corporate climate targets in Asia are still relatively new, so the companies that have made them are still operating in a “honeymoon” period during which their promises to lower emissions or disassociate from carbon-intensive activities are enough to win some goodwill from the public.

What happens as the targets get closer and more discerning voices get louder about being accountable?

In the developed markets, some of the largest companies have had more time to reckon with the realities of their targets. One response has been to pull back ambitions to a level that is more achievable or more aligned with economic objectives.

Oil majors BP and Shell have abandoned short-term emissions targets for more lenient ones. Consumer goods giant Unilever slowed down the pace at which it would cut its use of virgin plastic. Bank of America drew criticism for backing away from earlier pledges not to finance thermal coal and oil drilling in the Arctic.

Asia’s poor aim

Asia’s companies are likely to face a reckoning over their targets as well.

MSCI determined that the vast majority of the Asia-Pacific companies it assessed are unlikely to meet their climate goals. In South-east Asia, 98 per cent of companies assessed had targets that were less than fully credible, not credible or absent.

Asked about those findings, Kenji Watanabe, vice-president of Apac ESG and climate research at MSCI, said it was “not too surprising” to find low credibility among the region’s companies because there is a lack of regulatory guidance on climate target frameworks and accountability measurement in the region.

Whether Asia will see a meaningful recalibration of corporate climate targets remains to be seen.

Aurelia Britsch, global head of climate research at Sustainable Fitch, said many developing countries’ climate commitments under the Paris Agreement allow them to achieve most of their decarbonisation later on.

This provides developing countries with some breathing room in the short and medium term to avoid sacrificing too much economic and social development in the hope they can decarbonise at an accelerated pace down the road.

Similarly, companies in this region that adopt targets and glide paths aligned with their countries’ goals might be able to backload their decarbonisation requirements.

“If you’re a corporate based in South-east Asia or developing Asia, it’s still credible and still aligned with net-zero pathways to decarbonise much faster later on,” Britsch said.

Beyond targets, it’s just as important that companies in the region improve their decarbonisation strategies.

Britsch said what constitutes a sufficiently ambitious target can be difficult to ascertain given the speed at which climate change is occurring. Amid that uncertainty, what’s more useful is a company’s plan and track record in achieving its targets.

“What helps us to assess credibility is the underlying transition plan,” she said.

Government support

Policy support, such as carbon pricing, is one of the most important factors in how well companies in the region will be able to meet their targets.

“Government policy remains one of the most efficient and one of the only effective ways to dictate the pace of climate mitigation,” Britsch said. “If there’s no government policy, then companies can have targets; but they don’t have the institutional and economy-wide transition to support that.”

What’s needed in Asia, she added, is not more corporate targets but more ambitious targets.

Britsch gave the example of Indonesia, which has received significant international interest in supporting the early retirement of its existing coal plants. The country is one of the world’s largest consumers of coal energy and has one of the youngest fleets of coal plants.

However, the Indonesian coal policy has come under criticism for its ambivalence about phasing out coal. That has, in turn, created unease among investors, who are reluctant to commit to projects without certainty about policy alignment.

“Corporate targets don’t live in a vacuum,” Britsch said.

Wang Xiaoshu, head of Apac ESG and climate research at MSCI, said policies such as the adoption of internationally recognised disclosure standards and supply chain accountability can improve the credibility of targets.

Other business stakeholders can exert pressure on companies to perform better as well.

“Based on our observation, investors have sharpened their focus on the financial impacts of climate change, and they also face regulatory pressure to decarbonise their investment portfolios or report on financed emissions,” Wang said.

Transition risk

MSCI’s Watanabe said poor performance on targets could have an impact on broader economies in the region.

“Missing targets could possibly heighten the risk of procrastinating the decarbonisation progress in Asia, but it also depends on the intricate details and relationship among companies, governments and investors in terms of the likelihood of different scenarios occurring,” he said.

“Therefore, it all comes down to the progress of the decarbonisation of the entire real economy.”

Sustainable Fitch’s Britsch said companies could be vulnerable to elevated climate-related risks unless and until they improve their decarbonisation performance.

As it is, very few Asian companies are carrying out comprehensive assessments of climate-related risks that include physical risks and climate adaptation plans, Britsch said.

“I don’t think climate-related risks are priced in,” she said.

?? Top ESG reads:

1. Investors should spend time reading companies’ sustainability reports, says SIAS chief David Gerald.
2. China’s major asset managers are not planning to phase out fossil fuel investments, according to Greenpeace.
3. The shipping industry’s transition towards new green fuels like ammonia and methanol presents new safety challenges, says Singapore’s transport minister.
4. Singapore’s national water agency is looking for innovative solutions to support the country’s coastal protection and flood management efforts.
5. Keppel Reit has established a green financing framework that will serve as a reference for all green finance transactions it issues.

What do you think about today’s newsletter? Let us know at [email protected] . Sign up for the full version here .